Air France-KLM Plans Seats Splurge as Discount Rivals Circle

(Bloomberg) -- Air France-KLM Group said it will accelerate capacity increases despite an uncertain economic climate in order to defend its share of an air-travel market that’s becoming flooded with discount rivals.

The Paris-based carrier will boost seating by up to 4 percent this year in a bid to combat the low-cost challenge, even as fuel expenses jump by a forecast 150 million euros ($188 million), it said in a statement Friday. The stock declined as much as 7.5 percent to the lowest in eight months.

“As we enter 2018 in a context of rising oil prices and even more intense competition, we will go on the offensive,” Chief Executive Officer Jean-Marc Janaillac said. More partnerships are planned to help defend long-haul markets, but the company played down prospects for investing in Italy’s Alitalia SpA.

Air France-KLM is keeping its foot to the pedal after breaking a cycle of losses and labor unrest, helping to propel the stock up more than 160 percent last year. The company faces a heightened challenge as Ryanair Holdings Plc moves to open its first French bases, while long-haul discounters led by Norwegian Air Shuttle ASA are encroaching on trans-Atlantic routes.

Shares of Europe’s largest airline, which cautioned that the “global context remains uncertain,” traded 6.1 percent lower at 10.05 euros as of 1:57 p.m. in Paris. That stock has slid 26 percent this year after the mammoth 2017 advance that led the 29-member Bloomberg World Airlines Index.

Janaillac pledged to keep a close eye on Ryanair, which said Tuesday it aims to open at least two bases in France, starting with five aircraft apiece, as a reluctant embrace of unions removes barriers to expanding in a market where companies are required to let workers organize.

“We are for competition, but fair competition,” the CEO said, adding that his company will watch “to see they respect the laws.”

Air France-KLM’s planned capacity jump follows a more modest 2.6 percent boost in 2017, encouraged by higher bookings and unit revenue, a measure of fares, in most arenas other than the French domestic market. Seat increases will include inter-continental services, where the British Airways discount arm Level aims to offer Paris-New York flights for 129 euros.

Cool on Alitalia

Chief Financial Officer Frederic Gagey told Bloomberg TV there are no plans for Air France-KLM to launch its own low-cost long-haul unit, and that partnerships including the purchase of a 31 percent stake in Britain’s Virgin Atlantic Airways Ltd. are “weapons to answer attacks from competitors.” It’s possible that the strategy may need to be “reinforced” depending on how effective the deal proves to be, Janaillac said at a press briefing, without elaborating.

Gagey talked down the likelihood of taking a stake in Alitalia, saying that while Air France-KLM is “not totally uninterested” given its existing relationship with the insolvent carrier, which is seeking investors, that “doesn’t mean we will be involved in the equity.” Janaillac added that the aim is to keep the Rome-based company in the SkyTeam alliance without buying it.

Air France-KLM plans to cut unit costs as much as 1.5 percent in 2018 after they were flat last year, aided by increased productivity, higher fleet utilization and the expansion of full-service, low-expense brand Joon. That excludes the forecast increase in the fuel bill.

Operating profit last year jumped 42 percent to 1.49 billion euros, the company reported. Analysts had predicted a figure of 1.52 billion euros, based on 13 estimates. The Dutch KLM arm made the biggest contribution and had an 8.8 percent margin, versus 3.7 percent at Air France. The group had a net loss of 274 million euros following a one-time pension expense of 1.43 billion euros.

©2018 Bloomberg L.P.